GST is just a political tax. Scrap it.

The foundation for moving to GST was the neo-liberal economic fantasy; supply side economics. Free the entrepreneurs, the suppliers of goods and services, from regulations and taxes. This would give them investment capital to follow their visions, responding to the laws of demand and supply to create and supply the goods and services needed and demanded within the economy.  Competition would make things cheaper and opportunities would open up throughout the economy. 

So GST was about shifting the tax burden away from the entrepreneurs and onto ordinary people, the demand side of the economy. So income and other taxes on business went down and taxes on ordinary people went up. 

The economists and right wing politicians promised we would be better off, but after almost 40 years experience we know it was lies, and supply side economic theory is rubbish.

So what did our great entrepreneurs do with their investment money gained from lower taxes? 

• It went overseas seeking easy money in stock market rises rather than in the harder work of producing to supply goods and services within the New Zealand economy. 
• Investment capital went into the holding of capital assets; shares, bonds, luxury goods, property. Money for innovation, start ups, and productivity dried up.
• It sent investment and jobs overseas to bring down production costs and increase profits. We lost well paid jobs and opportunities to grow skills in the New Zealand workforce. This impacted the ability to find skilled people in New Zealand.  

Now our businesses moan for overseas workers, skilled or low wage middle class workers, to make their business profitable. Other nations lose their best people, and families lose loved ones for months. Is this model any better than the exploitive gulf state immigration models?  

So large business leaders have protected their own wealth base by investing in capital assets rather than build production and grow the New Zealand economy. They minimised risk by not taking risks. 

We all know GST is a regressive tax that falls heaviest on the poor because they spend all their income. The same for the middle class who are spending more on the basics. The tax burden is being carried by those less able to bear it. No civilised society should have GST. 

But GST also damages the ability of our economy to adapt. We need to move from fossil fuel SUV’s and cars, to electric or hybrid. Or more energy efficient household appliances. Or to do up our houses to be more energy efficient. But these are large cost items that are made very expensive with an extra 15% GST cost.  It is more costly to adapt on the consumer level therefore the forces of demand are not sending the right market signals. 

Getting a loan is therefore the main way this upgrading is currently sustained and this is creating its own problems for the middle class who are getting swamped in debt. Nice for the lenders. 

GST helps change buyer behaviour to favour lower priced but lower quality products. The 15% GST increases the price differential from quality to poor quality products. This exaggerates the price edge of rubbish products. The market is getting the wrong signals on what to produce. 

GST is harming our economy and people. The extra investment money made available to the wealthy through lower taxes has not been used to innovate or grow our economy. New Zealand has low investment rates in research and development hence we have a government funded scheme to try and encourage it. The neo-liberal purpose of GST has failed. But it is very easy to get rid of GST.

1. Move to taxing gross income rather than net income (no deduction for expenses, except domestic salary and wage PAYE payments)
2. Remove the capital revenue distinction for non-individuals.

These steps would:

• Stop huge areas of tax avoidance and tax minimisation. The big high cost structure business would begin to pay their fair share of tax. 
• Remove the current tax settings that favour multinational companies. It would be harder for multi-nationals to profit strip out of New Zealand without paying more tax. 
• Return a comparative advantage to local low cost businesses. Part of this is because it increases the cost of imports, rather than as currently subsidised.
• Create better economic signals to producers. Inefficient or environmentally damaging practises would not be subsidised as currently. Excessive exploitation of natural resources would not be subsidised. The true cost of oil/coal, exploration/extraction would be reflected in the price of the product. 
• Allow us to move to a 10% rate of tax on ‘gross income’ for non-individuals. [I make no suggestions on individual tax rates at this point].  This would collect more money than by our current taxation of net income and GST. This 10% rate would be enough to fully cover the removal of GST and still leave extra money for government to invest/spend. 

But there would be reactions:

• Tax administrators tend to love GST. It’s low cost to run. Business collect it, it’s easily integrated with normal sales invoicing process. It’s regular income coming into government based on monthly or two monthly returns. 
• But all these advantages can be replicated with a sales system that puts all sales through an IR register bank account and every deposit gets a simple 10% tax deduction that is tagged before sent to the non-individuals other accounts. Deposits in those other accounts not tagged would attract audit attention. 

Removing GST would in theory reduce prices by 15%. But large businesses paying more tax means they would fight back, with inflation. More tax is more cost so they would try and get GST back through prices rises and a bit more because change is a chance to maximise profit. All to frighten government and the Reserve Bank to back down.

Therefore government must do what it used to do – supply many essential goods and services at low cost. Perhaps like we will do with the current flooding emergencies. I have already suggested how to do this for groceries, energy, and cars. This means private business will have some real competition to keep prices lower, like they used to.  This is not only do-able but essential. 

The neo-liberal economic theology used to justify shifting our economy to tax people through GST, has not made us wealthier. It damages our economy by making it more costly to adapt. 

All that’s left to justify GST is politics. The National/Act political dance of a thousand veils forever promising an economic heaven with a second coming, but always just around the corner after the next election, or the one after that. 

Removing GST is a substantial and tangible help for voters. Price rises would be the greedy actions of business. Small domestic low cost businesses would see benefit in a low flat tax rate. Large high cost structure businesses, mostly multi-national franchises would fight like hell. Our local business representatives would generally side with the status quo that pays their salary and sustains their shares. But having no GST is just returning to our previous status quo. These are ways to shape the fight.   

Change by Labour can’t happen without a fight; that means challenge, pain, courage and vision. A bit like what the current storms are forcing onto the government and people. We have to change. Do the vision stuff. Get rid of GST fully.